An exclusion clause is a term in a contract that seeks to restrict the
rights of the parties to the contract. Traditionally, the district courts have
sought to limit the operation of exclusion clauses. In addition to
numerous common law rules limiting their operation, in England and Wales Consumer
Contracts Regulations 1999. The Unfair Contract Terms Act 1977 applies to all
contracts, but the Unfair Terms in Consumer Contracts Regulations 1999,
unlike the common law rules, do differentiate between contracts between
businesses and contracts between business and consumer, so the law seems
to explicitly recognize the greater possibility of exploitation of the
consumer by businesses. Types of Exclusion Clause
True exclusion clause: The clause recognizes a potential breach of
contract, and then excuses liability for the breach. Alternatively, the clause is
constructed in such a way it only includes reasonable care to perform
duties on one of the parties. Limitation clause: The clause places a
limit on the amount that can be claimed for a breach of contract, regardless of
the actual loss. Time limitation: The clause states that
an action for a claim must be commenced within a certain period of time or the
cause of action becomes extinguished. Term Must be Incorporated
The courts have traditionally held that exclusion clauses only operate if they
are actually part of the contract. There seem to be three methods of
incorporation: Incorporation by signature: according to
L'Estrange v Graucob, if the clause is written on a document which has been
signed by all parties, then it is part of the contract. If a document has not
been signed, any exception clause which it contains will only be incorporated if
the party relying on the clause can show that he took reasonable steps to bring
it to the attention of the other party before the contract was made. In
somewhat of a contradiction, that is not to say that the proferens actually has
to show that the other person read the clause or understood it. It is not even
necessary to show that the attention of that particular person was actually
drawn to it. It is somewhat like the 'reasonable man' test in tort: the party
trying to rely on the clause needs to take reasonable steps to bring it to the
attention of the reasonable person. Incorporation by notice: the general
rule, as provided in Parker v SE Railway is that an exclusion clause will have
been incorporated into the contract if the person relying on it took reasonable
steps to draw it to the other parties' attention. Thornton v. Shoe Lane Parking
seems to indicate that the wider the clause, the more the party relying on it
will have had to have done to bring it to the other parties' attention. The
notice must be given before formation of the contract as illustrated in Olley v
Marlborough. Incorporation by previous course of
dealings: according to McCutcheon v David MacBrayne Ltd, terms may be
incorporated into a contract if course of dealings between the parties were
"regular and consistent". What this means usually depends on the facts,
however, the courts have indicated that equality of bargaining power between the
parties may be taken into account. Judicial Control of Exclusion Clauses
= Strict Literal Interpretation = For an exclusion clause to operate, it
must cover the breach. If there is, then the type of liability arising is also
important. Generally, there are two varieties of liability: strict liability
and liability for negligence. The courts have a tendency of requiring
the party relying on the clause to have drafted it properly so that it exempts
them from the liability arising, and if any ambiguity is present, the courts
usually interpret it strictly against the party relying on the clause.
As espoused in Darlington Future Ltd v. Delcon Australia Pty Ltd, the meaning of
an exclusion clause is construed in its ordinary and natural meaning in the
context. Although we construe the meaning much like any other ordinary
clause in the contract, we need to examine the clause in light of the
contract as a whole. The judge in R & B Custom Brokers Co. Ltd. v United
Dominions Trust Ltd. refused to allow an exemption clause, of which did cover the
nature of the implied term, on the grounds that it did not make specific
and explicit reference to that term. = Contra Proferentem =
If, after attempting to construe an exclusion clause in accord with its
ordinary and natural meaning of the words, there is still ambiguity then the
contra proferentem rule applies. Essentially this means that the clause
will be construed against the person who imposed its inclusion. that is to say,
contra the proferens. In terms of negligence, the courts have
taken the approach that it is unlikely that someone would enter into a contract
that allows the other party to evade fault based liability. As a result, if a
party wishes exempt his liability for negligence, he must make sure that the
other parties understand that. The decision in Canada SS Lines Ltd v. The
King held that: If the exclusion clauses mention
"negligence" explicitly, then liability for negligence is excluded.
If "negligence" is not mentioned, then liability for negligence is excluded
only if the words used in the exclusion clause are wide enough to exclude
liability for negligence. If there is any ambiguity, then the contra
proferentem rule applies. If a claim on another basis can be made
other than that of negligence, then it covers that basis instead.
In Australia, the four corners rule has been adopted in preference over the idea
of a "fundamental breach". The court will presume that parties to a contract
will not exclude liability for losses arising from acts not authorised under
the contract. However, if acts of negligence occur during authorised acts,
then the exclusion clauses shall still apply; see also
If the contract is for the carriage of goods, if the path is deviated from what
was agreed, any exclusion clauses no longer apply.
In Australia, exclusion clauses have been recognised as valid by the High
Court. They do not apply in cases of deliberate breach.
Statutory Control Even if terms are incorporated into the
contract and so would be effective, there are various statutory controls
over the types of terms that may have legal effect. The Unfair Contract Terms
Act 1977 renders many exemption clauses ineffective. The Unfair Terms in
Consumer Contracts Regulations 1999 provide further protection for
consumers. References
^ [1934] 2 KB 394 ^ 4 CPD 416
^ [1971] 2 WLR 585 ^ [1949] 1 All ER 127
^ [1964] 1 WLR 125 ^ 161 CLR 500
^ [1988] 1 All ER 847 ^ The term in question was the implied
term as to fitness-to-purpose pursuant to the Sale of Goods Act 1979 s14(3).
^ Darlington Futures v Delco Aus HCA ^ [1952] AC 192
^ The Council of the City of Sydney v West 114 CLR 481
^ Davis v Pearce Parking Station Pty Ltd [1954] HCA 44: Clear words are necessary
to exclude liability for negligence. ^ Thomas National Transport v May &
Barker [1966] HCA ^ See Thomas National Transport Pty Ltd
v May and Baker Pty Ltd [1966] HCA 46; 115 CLR 353